How to best invest a lump sum
Q: I'm 63 and looking to retire at the end of 2013. I'd like to top up my pension and have a lump sum of around £50,000 to invest.
Could you give me some ideas as to where I could invest to give me a monthly supplementary income to boost my pension? I'm not prepared to take any high risks with this money.
A: Philip Pearson is a partner at P&P Invest in Southampton.
With interest rates at a historic low, the returns from an easy-access savings account averages at 0.93%, so you should consider an alternative to cash for the majority of the £50,000.
However, if this is your only savings, then allocate £5,000 as a contingency fund against uncertainties. This should stay in a cash ISA or, if you've already used your allowance, in a savings account.
The best way to achieve this would be through a portfolio of fixed-interest and UK equity income funds, in a stocks and shares ISA where up to £11,520 can be invested each year, or £5,760 if a cash ISA has already been used.
After you've used up this allowance (and put £5,000 in an easy-access savings account), you'll have nearly £34,000 spare. Collective funds, like unit and investment trusts, are ideal as they spread risk through diversification, and when selected outside of a stocks and shares ISA, accumulate capital growth free of tax.
This means they grow tax-free until you cash in the profits. Don't forget your capital gains tax (CGT) allowance each year is £10,900 (2013/14), so you'll only pay tax on interest above this.
You can reduce the CGT you have to pay by using a process known as 'bed and ISA'. This is where you sell your investments then reinvest part of them, up to the ISA allowance, into your ISA at the start of the next tax year.
Your ISA manager should be able to do this for you at no cost, provided you buy back the investments within the next 30 days.
If you don't have experience in investing in the stockmarket, a good starting point would be the Fidelity Moneybuilder range of funds. These offer good value, with no initial charge to invest, and can provide a high income with scope for capital growth.
Blend Fidelity Moneybuilder Income with Fidelity Moneybuilder balanced fund. If you do this, you'll get an average income of around 4% on a monthly basis, which is approximately four times that available from deposit accounts at this time, but with a limited amount of risk.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.